The strangled spirit of entrepreneurship

Wafiur Rahman
Thursday, December 22nd, 2016


 

Many policy makers would assert that impressive economic growth is unattainable without a high incidence of entrepreneurship. After all, entrepreneurs – through their innovation and hard work – create lasting positive impacts on the economy, mostly by generating employment and increasing the productivity with which resources are utilized. As a result, it is hardly any surprise that a large fraction of the economic growth in the BRICS nations (that is, Brazil, Russia, India, China and South Africa) has been attributed to their entrepreneurs. Similarly, Bangladesh must nurture its budding entrepreneurs – especially the high-tech ones – if it wants to put its economy on the growth trajectory.

 

However, the strategy is easier said than done. In Bangladesh, one of the greatest impediments to launching and running a business is the intricacy involved in obtaining funds. According to the Doing Business 2016 report (jointly prepared by the World Bank and the International Finance Corporation), Bangladesh ranks 133th among 189 countries, when it comes to providing credit to businesses. Even though this is not as miserable as Bangladesh’s rank in other aspects of the business environment, such as getting electricity and registering property (where Bangladesh ranks 189th and 185th respectively), the situation still raises red flags on the financial difficulty faced by potential entrepreneurs – especially when the scenario is compared to countries where entrepreneurship is driving rapid economic development. Take, for instance, India where a swarm of entrepreneurs has emerged in the last two decades; not surprisingly, the country is at the impressive 42nd position on the ease of getting credit.

 

In Bangladesh, obtaining seed funding is extremely difficult for young, inexperienced entrepreneurs despite their seemingly profitable (albeit risky) projects. The phenomenon may be attributed to a dearth of venture capitalists and angel investors in the country; the distinction between these two types of funders is that the former pool funds from several other investors while the latter use their own funds. If you look at the most successful companies around the world, you will not only find an ingenious entrepreneur but also a wise venture capitalist or angel investor behind them. Apple would not have come into being without the angel investor Mike Markkula. The Chinese search engine company Baidu would have never seen the light of the day without the support from a number of venture capital firms, such as Peninsula Capital and Integrity Partners.

 

Venture capitalists can be immensely beneficial to a business because they take part in the management. The experience of the venture capitalists, coupled with the energy and the creativity of the entrepreneur, increases the likelihood that the business will succeed. This is where this group of investors differs from mere creditors; venture capitalists do not act as traditional lenders – instead, they obtain equity in the business and thus bear the responsibility if the business fails. In most cases, the venture capitalists have to offer several rounds of financing – from the seed stage to the pre-public (bridge) stage and reap the benefits from their investment by selling their stakes in the company once the business goes public. However, if the business fails, venture capitalists may even lose the entire amount of their investment. Due to such huge downside risks, the handful of venture capital firms that are operating in the country right now – such as Asian Tiger Capital Partners and Venture Investment Partners Bangladesh – have been very cautious about their investment decisions.

 

This small number of venture capital firms is in no way sufficient to support the hundreds of potential start-ups in the country that are never launched due to the lack of funding. The greatest jolt from this phenomenon is felt by the fledgling Information and Communications Technology (ICT) sector of Bangladesh. Unless new venture capital firms emerge or existing companies start their own venture capital wings, the growth of entrepreneurship in the ICT and other sectors will remain stifled, and the economy of Bangladesh can never reach its full potential.

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